I HOLD THIS TRUTH TO BE SELF-EVIDENT, THAT A DEBT CRISIS CANNOT BE RESOLVED WITH MORE DEBT

Friday, May 8, 2009

Bailouts, Inventories and Jobs

The "green shoots" that everyone is talking about, and which are greatly responsible for causing the current (dead cat ?) bounce in stocks, are best explained thus:

1. The massive bailout of the financial system (approx. $14 trillion in equity injections, loans and guarantees) prevented its meltdown. However, financial stocks had priced in such a risk by moving much lower (the KBW US bank share index was down 85% at its low) and are now simply correcting this negative excess.

But, this is NOT the same as a rally based on better business prospects for the future. Thus, it has "short-term and limited" written all over it.

2. The sharpness of the consumer pull-back caused businesses to likewise sharply curtail new orders to work down inventory. Since the economy now operates on VERY tight inventory-to-sales ratios (JIT: Just In Time deliveries) this caused a whole series of dominoes to drop all the way back to BRIC+ manufacturers, commodity producers and transportation companies. As inventories dropped, however, some new orders are now - necessarily - reappearing, exactly because of JIT.

But, these are NOT orders based on projected robust growth; they are simply replacement orders, and they reflect reduced consumption going forward. Thus, the "real" economy has "anaemic" written all over it, at best.

3. Because of the above sharp pullback, employment got hit very badly, very fast. Continued claims for unemployment insurance shot up in a straight line and are at the highest level ever. Because of the inventory adjustment orders, however, going forward the rate of job losses will subside somewhat and this is causing unwarranted cheer.

But, fewer job losses should not be interpreted as a sign the economy has turned the corner, as it has in the past; the slower pace is expected, after such a huge decline.

Bottom line: do not be fooled by the "green shoots". They are merely happy talk from officials anxious to turn lemons (a slower pace of decline) into lemonade. Let me put it in mathematical terms: just because the second derivative is getting less negative doesn't mean the first derivative has stopped going down..______________________________Jobs Report Addendum

The BLS reported that 539,000 jobs were lost in April, "better than expected" because the consensus amongst analysts was for a figure around -600,000. Markets cheered.Some observations, however:

The previous months were adjusted down to show an additional loss of 66,000 jobs.

The government added a near record 72,000 jobs because it is hiring upcoming census takers.

The BLS Birth/Death model was at it again, adding 226,000 jobs (not seasonally adjusted). For what it's worth, this statistical model has added jobs to the reported figures in 12 out of the last 13 months; in a recession, no less...

This blog takes such a bearish slant. You seem to be trying so hard to ignore the good things that are happening.

1. The bailout worked. Furthermore, the stress tests revealed that there are a great deal of banks out there that will survive. The fact that these viable banks are so cheap makes them undervalued. That alone is a reason to invest in them long term.

2. New orders are a good thing! Credit has begun to thaw, and businesses can finally finance their operations successfully. That's why you're seeing more new orders.

3. Less people are being layed off. Obviously, you don't like to see a negative number, but the market was expecting a much worse number.

If it were just one of these three signs, I would agree that it can be ignored - but there are three of them. That's something you have to pay attention to.

Everything is fine again. Back to Ponzinomics. The recession is over. Go out and start running up your credit cards again. Looks like housing is about to bottom out as well."Nation Ready To Be Lied To About Economy Again"

"I thought I wanted a new era of transparency and accountability, but honestly, I just can't handle it," Ohio resident Nathan Pletcher said."

"From now on, just tell me the bullshit I want to hear," Pletcher added.

We are drowning in bullshit. All major banks are mis-managed. The ratings agencies led us down the path of financial slaughter. Health care is a mess:Hospital mismanagement causes more needless deaths than car, guns, and "terrists" combined (http://www.medicalnewstoday.com/articles/11856.php)

yet the "professionals" in these organizations proceed unchecked.

Thank god for fresh air of accuracy provided by engineers and scientists that still have affection for their learning.

Although millions of jobs vanish, millions appear. It has ever been thus. We're seeing a weeding out of the old and weak. This is the basis of natural selection and the reason organisms have progress beyond the algae stage.

For the future:

1. Workers will become younger and progressively more empowered.

2. Historically 30-35 was the typical time of death. Hence you should be grateful of any additional time. If you're not a millionaire by 35, something is wrong with you anyway.

3. You will be granted to opportunity to prove your worth in the global arena. Just as Spartans were required to compete on pain of death, so should US citizens.

4. If you do not have a net worth of 5 million by 45, we kick your ass out of the country.

" If you do not have a net worth of 5 million by 45, we kick your ass out of the country."..."As of 2007 90% of all American families had a net worth under $750,000. I guess that would present a problem?"

OK, change that to: If you haven't consumed 5 million $$ worth of stuff by 45 we kick you out of the country, 'cos that's un-American and you're useless as consumer.

I am sure some of you heard about the "Cash for Clunkers" bill where the goverment will throw up to $4500 at irresponsible gas guzzler owners to buy a slightly more efficient vehicle. Let's extend the idea to get rid of unwanted wives. So here is goes...Under the plan’s new-spouse provision, a man who divorces and then marries a new woman at least 10 years younger and/or 50 pounds lighter than his ex-wife would be eligible for up to $10,000 in government funds. If only one of the conditions is met, the payout would decrease to $5,000.“We put those provisions in there for a good reason,” noted Dingle. “If you replace your middle-aged, unattractive wife with another middle-aged, unattractive wife, there’s really no incentive to maintain a costly appeasement campaign, for example, plying them with expensive perfumes and jewelry. But, if you replace your middle-aged, unattractive wife with a young hottie, you’d better believe you’re going to have to do all sorts of things, as an older man, to ensure her attention doesn’t wander. That costs money, and spending money generates taxes.”...for full article see:http://wineandexcrement.com/cash-for-clunkers-plan-expands-to-include-charmless-wives/1356/

Finally a bill that is sure to stimulate consumer spending. These days it is a challenge to differentiate between a good satire and actual ideas coming out of DC.

" We're seeing a weeding out of the old and weak. This is the basis of natural selection and the reason organisms have progress(ed) beyond the algae stage."

Obviously you have never read or understood Darwin. Any changes that become apparent after the age of reproduction (old) are not selected for in the reproduction of the species. On the other hand society would be losing a lot of knowledge if this is what is happening which in your case seems to be particularly deficient. I would watch out if your wish were to become true. You are creating your own hell.

By the way there is a very good article in this week's New York Review of Books, I believe it is on-line too, on the 50th anniversary of Darwin's origin of the Species.

@ Marcus

"Thank god for fresh air of accuracy provided by engineers and scientists that still have affection for their learning."

Well said, although it does sound a bit like a regret straight out of Orwell's 1984.

SS-Thanks for the kind comment, as for the 1984 regret comment?What matters motivation if its "well said"?

From yahoo finance titled "The Biggest Boondogle in History", you think William Black may have it?

"If the goal of Tim Geithner and other regulators was ""to rip off the American taxpayer for the benefit of the least-deserving wealthiest people you can imagine, well - mission accomplished,"" Black says.

@"If the goal of Tim Geithner and other regulators was "to rip off the American taxpayer for the benefit of the least-deserving wealthiest people you can imagine, well - mission accomplished," Black says."

Marcus,You don't really believe that any of the above shuffling of wealth can actually make any difference to the one and only possible structure of a society because, as has been ably demonstrated on this site so many times previously, that is as immutable as gravity; I thought everybody knew that by now.

One afternoon an investment banker was riding in his limousine when he saw two men along the roadside eating grass. Disturbed, he ordered his driver to stop and he got out to investigate.

He asked one man, "Why are you eating grass?"

"We don't have any money for food," the poor man replied. "We have to eat grass."

"Well, then, you can come with me to my house and I'll feed you," the banker said."But sir, I have a wife and two children with me. They are over there, under that tree.""Bring them along," the banker replied.Turning to the other poor man he stated, "You come with us, also."The second man, in a pitiful voice, then said, "But sir, I also have a wife and SIX children with me!"Bring them all, as well," the banker answered.They all entered the car, which was no easy task, even for a car as large as the limousine was.Once underway, one of the poor fellows turned to the banker and said, "Sir, you are too kind.""Thank you for taking all of us with you."

Well, it sounds like the U.S. economy is entering the "nickel and dime us to death" phase that many Western European economies have been putting up with for far too long.I call it nickel and diming it to death (i.e. you invest AFTER you get orders and not before, and you make the customer wait until next Easter for what he wants (a little bit like all those humongous LINES that people had to wait in in "Communist" countries... SHHHH don't even allow the word "Communist" to enter your head because it is ten million times more unthinkable for an American mind than the word "socialist" and who knows, maybe you could even DIE for thinking it...) by which time he has already forgotten what he wants, but these days, maybe the customer will start getting SMART and figure out that he could possibly (in certain cases...) MAKE HIMSELF WHAT HE WANTS (or something approaching...))

Whew, that was really long. I hope that you are still with me. I am NOT James Joyce, and that was not really stream of consciousness either.

It is called "flux tendu" over here. It's been around for a long time now, and it can last for a long time too, Hell. It does nothing for morale, or jobs or anything. It is like... PURGATORY, not... HELL.But it takes all the joy out of living.

You know... I have been following Hell's blog for over 1 year and a half (perhaps 2), and find his articles among the best I read (and I read a lot of stuff)...

Perhaps David Rosemberg would rank as high in my list...

The point here is just to say... I wouldn't call this a bearish blog. He calls them as he seems them... And for all the people that seem to label us (I tend to agree with Hell on almost everything) "bears", know this, EVERYONE prefers a bull market... simply because its MUCH EASIER to make money...

I for one have my "capital preservation" hat on... I am fighting to keep what I made in the previous bull run, and have capital to invest in the next one... in the meantime, can you spell YIELD?

Corporate credit at 100 year wides... why bother with stocks, when CBS paper pays 8-9% for 3 year maturity...

This comment is for the numerous philosophers on our blog.This morning I was dreaming away in semi-consciousness, and I got all excited on YET ANOTHER repercussion of the Merchant of Venice (that Hell has probably not read for quite a while, and that most other philosophers on this blog have not dug into for a while either, I bet...).It's about gambling, risk taking, agressive behavior, and young men.Bear with me, I will tie all of this together for you.I read a short while ago that ALL of the higher mammals that live in groups are confronted with the testosterone problem in their young males, who often band together to engage in some INCREDIBLY antisocial and destructive behavior before the testosterone cools down a bit (I'm not accusing, or belittling anyone here, that's not my style...).I think that we could reflect on this observation, and its implications for US, social animals par excellence.I think that risk, adventure, gambling, addiction, the lure of the absolute are perhaps aspects of this question. The Merchant of Venice very much addresses these problems. In a basically MAN'S world, in Venice, one YOUNG man sollicits his older friend and mentor to INVEST in a very risky ENTERPRISE (an adventure) : giving him money to go court a VERY WEALTHY WOMAN who many men desire...If BOTH MEN WIN, then they get an excellent return on investment. But if they don't, then not only do they lose their shirt, one of them loses a pound of flesh, and dies.Pretty risky, isn't it ?Anybody think about gambling yet, and the traders, and all the excitement involved in risking EVERYTHING ?Go read the middle of the play, when Bassanio risks everything on a coffer of LEAD which threatens more than it promises.We are collectively in the middle of the play right now.AND...We are NOT investing in the lead coffer where the treasure is. We are investing, once again, in the gold coffer because it LOOKS GOOD, you guys.What we really SHOULD be investing in, is PEOPLE.INDIVIDUAL PEOPLE.And...Since I like to keep you guessing about where I'm going,..UNTIL WE START REVERSING OUR INCREDIBLE TENDANCY TO IMPRISON A STAGGERING PERCENTAGE OF OUR GREATEST RESOURCE, OUR PEOPLE, we will CONTINUE going down the tube.WE ARE NOT GENEROUS in this country.And we are not investing in our PEOPLE.And, IN A MAN'S WORLD, women just have NO PLACE.Because the two are antithetical.Of course, WOMEN MASQUERADING AS MEN have a place in a man's world, but the two universes are really VERY foreign...We ought to think about THAT a little bit too...

About Me

I was educated as a chemical engineer but spent almost my entire career in finance, particularly in money, FX and bond markets. The name stands for Hell-as-IOUs and the picture points to Quixotic endeavors.